When you’re majorly in debt, getting out of debt can feel hopeless, especially if you’re facing high-interest rates. Making minimum payments—if you can keep up—hardly feels like progress when the balance is still higher than it was when you first borrowed the money.
Depending on your circumstances, you might not be stuck fully repaying all of the debt you owe. You might qualify for debt forgiveness.
With debt forgiveness, a lender forgives a portion of or all of the debt you owe on your mortgage, student loans, credit card, etc. Achieving partial or full debt forgiveness is possible for some borrowers. You’ll need to qualify for the type of forgiveness you’re seeking and follow all required steps.
Fair warning, debt forgiveness can be a tricky business filled with scam artists promising to get your debt forgiven in exchange for hefty upfront payments. Debt forgiveness can also damage your credit score and cost a lot of money. Before pursuing debt forgiveness, you must carefully evaluate the financial consequences and make sure that you fully understand your options.
Below, we’ll explore how to get debt forgiveness by looking at the different types of debt forgiveness out there.
Types of Debt Forgiveness Programs Available
Your debt forgiveness options vary depending on the type of debt you have, your income, your assets, and even where you work.
Student Loan Forgiveness
Are you drowning in student loan debt? The federal government provides several legitimate debt forgiveness programs that can cancel or forgive your qualifying federal student loan debt.
- Public Service Loan Forgiveness (PSLF): 100% forgiveness of Direct loans after you make 120 qualifying monthly payments while working full-time for a qualifying employer
- Teacher Loan Forgiveness: forgives up to $17,500 in Direct Subsidized and Unsubsidized loans for qualifying teachers who teach in low-income schools
- Perkins Loan Cancellation and Discharge: cancel up to 100% of a Federal Perkins Loan for qualifying teachers
- Income-Driven Repayment (IDR) Plan Forgiveness: 100% forgiveness of qualifying federal student loans following 20-25 years of on-time payments for borrowers enrolled in an IBR
- Death Discharge: discharges 100% of all federal student loans if the borrower dies
- Total and Permanent Disability Discharge: discharges 100% of all qualifying federal student loans if the borrower becomes totally and permanently disabled
- Closed School Discharge: 100% forgiveness of qualifying federal student loans if you’re unable to complete your academic program because your school closed, and you meet other criteria
Before deciding to pursue student loan forgiveness, make sure you carefully read through the requirements of the program and understand the tax implications. For example, student loans forgiven through PSLF or Teach Loan Forgiveness are tax-exempt, but those forgiven from an income-based repayment plan are taxable.
Reach out to your student loan servicer with any specific questions about federal student loan forgiveness programs. Their customer service team can address any concerns, help you enroll in an income-driven repayment plan, or help you apply for forgiveness.
For a full overview of student loan forgiveness, check out our article, The Top Student Loan Forgiveness Programs.
Tax Debt Forgiveness
Do you owe back taxes? The IRS sometimes forgives partial tax debt through a process called “offer in compromise.”
An Offer in Compromise (OIC) permits the taxpayer to settle their tax debt for less than what’s actually owed. Only borrowers who can prove they would face financial hardship if they paid their tax liability in full—or borrowers who cannot pay their tax liability in full—have a shot at OIC. It has a low chance of success, and applying comes with risks.
The IRS has many ways to go after tax debts, so attempting to get paid in full is always done first. The IRS can withhold your tax refund, seize and sell your property, garnish your wages, or take 15% of your Social Security check. Borrowers with assets are expected to sell them and send the money to the IRS for repayment. That’s why only borrowers with virtually no assets or extra income have a shot at an offer in compromise. In 2015, the IRS received 67,000 offers in compromise but only accepted 27,000 offers.
See for yourself if you might qualify for an offer in compromise by using the IRS offer in compromise pre-qualifier tool. The tool will calculate a preliminary offer amount or will tell you that you can afford to pay your full liability.
If the tool tells you that you can pay your full tax liability, you’re still able to apply for OIC. However, it’s extra risky. When you submit an OIC, you have to disclose the value of all of your assets, your income sources, and your expenses. The IRS will have that information on file forever, and they can use that information to guide any future collections activity against you.
Credit Card Debt Forgiveness
Americans owe a collective $820 billion in credit card debt. If you’re struggling with credit card debt, your credit card issuer may forgive part of your balance during debt settlement.
Debt settlement helps a credit card company to recoup at least some of what you owe if they think you can’t repay the full amount or fear you’ll file for bankruptcy. Any amount that’s forgiven during settlement can be reported to the IRS, meaning it’s viewed as taxable income.
In general, only borrowers who are three or more months behind on their credit card payments qualify for debt settlement. Going that long with overdue credit card payments will destroy your credit score. Even still, the creditor could decide to sue you or garnish your wages before attempting debt settlement. Both of those actions harm your credit score too.
John Roa, an attorney for the National Consumer Law Center, advises that filing Chapter 7 bankruptcy is a better option than the debt settlement process. Bankruptcy would immediately stop any lawsuits or collections efforts and once approved, erase your credit card debt. Chapter 7 bankruptcy also provides relief much faster than debt settlement.
Bankruptcy still hurts your credit score, but you won’t owe any taxes on the amount of credit card debt forgiven.
For more information on credit card debt-relief options, read about 6 Simple Ways to Lower Your Credit Card Debt.
Mortgage Debt Forgiveness
Mortgage debt forgiveness won’t help you if you’re living in your home and falling behind on mortgage payments. However, it can help you if you’re a displaced homeowner whose house was already foreclosed and sold in a short sale.
A mortgage lender can “charge off” the deficiency balance, which is the difference between how much you owed the bank for your home and what the bank was able to sell the house for. The amount discharged is currently taxable, meaning you’ll need to pay income taxes on it. However, the Mortgage Forgiveness Debt Tax Relief Act of 2007 didn’t recognize the charged-off amount as taxable income. That act expired in 2016, but it’s possible for lawmakers to retroactively reinstate it.
If you’re struggling to make your mortgage payments, you have other options aside from giving up on your home and banking on mortgage forgiveness. Instead, consider refinancing your home, selling your home and moving into another home, or renting out a portion of your home to bring in needed income. Talking to your lender is a great first step.
What to Do Before You Pursue Debt Forgiveness
Debt forgiveness might sound like a great escape from the burden of consumer debt, but it’s not an easy path to pursue. Before you try to have your debt forgiven, do the following:
Make Sure It’s Not a Scam
Your debt is real money that you owe a lender based on terms you agreed upon or services you’ve received. That being said, if a debt forgiveness solution sounds too easy or too good to be true, there’s a very good chance it’s a scam.
Many third-party companies promise to help borrowers get out of debt in exchange for a fee. Some of these companies are legitimate. They can help you reach a debt settlement agreement with your creditor. Others are just looking to make money off of your vulnerable situation. Before you give a company your personal information or sign any paperwork, look them up on the Better Business Bureau.
A legitimate company should be able to provide you with written documentation outlining a clear timeline and outcomes. They will explain in detail how much using their services will cost you. If something seems off, walk away. You’re already in debt, so it’s not worth losing more money to a company that could very well be a scam.
Make Sure You Weigh the Pros & Cons
When it works out, debt forgiveness reduces what you owe, saving you money. Unfortunately, it’s not always straightforward or the best option for every borrower.
Only pursue debt forgiveness when it’s financially beneficial to you. Make sure that you can afford:
- Any taxes you’d owe on any discharged or forgiven debt
- The fees associated with debt forgiveness
- Interest payments or monthly payments under a repayment or settlement plan
- The hit to your credit score
Final Thoughts on How to Get Debt Forgiveness
Debt forgiveness is a real financial process that does help borrowers get out of debt. However, debt forgiveness is also a tricky process, and the debt forgiveness industry is full of scam artists.
When you pursue debt forgiveness, another area of your finances will likely be taking a hit in exchange for that debt forgiveness.
You might face an unexpected tax bill. If you’re unprepared for it, that could just mean more debt in the form of tax debt. Your credit score might become damaged, making it harder for you to rent an apartment, apply for certain types of jobs, or secure a line of credit. You might also be in a situation where you need to follow complicated rules in order to get that debt forgiven. A misstep could restart the process and delay that forgiveness.
Before banking on debt forgiveness, reach out to your lender. Explore other debt-relief options like installment plans, refinancing or consolidating, income-based repayment plans, or temporary deferment or forbearance.